How McDonald's Is Crushing KFC in the U.S.

If you're a fast-food investor, you're probably well aware that plenty of attention has been paid to China as a fantastic long-term growth opportunity for nearly every company in the space.

Yum! Brands (NYSE: YUM  ) , for one, is aiming to more than triple its presence in the country by ultimately building as many as 20,000 collective Kentucky Fried Chicken and Pizza Hut locations there. Meanwhile, McDonald's  (NYSE: MCD  ) has only begun its expansion in China, having previously outlined goals of growing its base from around 300 restaurants at the end of 2012 to as many as 2,000 by the end of this year.  

Image sources: KFC, McDonald's.

But I've got news for you: It's not all about China.

Don't get me wrong; China's still an important piece of the long-term puzzle, but we shouldn't forget both Yum! Brands and McDonald's are still waging an all-important war in the well-established U.S. fast-food market.

And though I'll admit Yum! Brands investors do get to enjoy a solid domestic growth platform with Taco Bell, it looks like McDonald's is currently eating KFC's lunch here in the states.

KFC's pain is McDonald's gain
Less than two weeks ago,
Yum! Brands not only shocked investors by reneging on its long-standing promise that same-store sales in China would turn positive by the end of 2013, but also said comps at its enormous U.S. division came in flat during the third quarter.

For reference, that was a notable decline from Yum!'s respectable 1% domestic same-store sales growth during the previous quarter, which was helped by 2% growth at Taco Bell and a 3% increase at KFC. This time around, however, while Taco Bell maintained its solid 2% domestic same-store sales growth rate, KFC swung to a surprise 4% decline.

As a result, I wondered at the time whether McDonald's third-quarter numbers would positively reflect Yum! Brands' KFC struggles here in the U.S.

Sure enough, though investors weren't particularly impressed with McDonald's in-line results Monday morning, I think they paint a telling picture.

Specifically, even though McDonald's comparable sales in the Asia-Pacific, Middle East, and Africa segment fell 1.4% and remained stagnant by rising just 0.2% in Europe, comps actually rose in the U.S. by 0.7% last quarter.

Of course, that's still lower than McDonald's U.S. comparable sales growth of 1% in the second quarter, but Mickey D's maintained its strength much more effectively than Yum! Brands in the third quarter largely thanks to KFC's domestic underperformance.

Here's how McDonald's is winning
So, how did they do it? 

McDonald's started by specifically calling out both its popular Monopoly promotion and its featuring "new core favorites" during the quarter. But what, exactly, are those new core favorites? 

For one, recall back in May that McDonald's made the decision to ditch its slow-selling line of Angus Third Pounder burgers in favor of a cheaper (and smaller) group of better-known Quarter Pounder sandwiches.

But McDonald's also took several more direct shots at KFC last quarter, most notably including the September rollout of its popular new Mighty Wings.

Image source: McDonald's.

But remember, McDonald's is currently only offering Mighty Wings through the end of November.Unless Mighty Wings become a permanent staple of the menu, KFC may be able to look forward to winning at least some of its business back.

However, McDonald's also says its new Premium Chicken Wraps have been selling well, which takes even more attention away from KFC's competing lunch menu items.

In addition, McDonald's kicked off the NFL season by testing out its very first multi-person boxed meal in the U.S., aptly dubbing it the "Blitz Box," for around $14.99. Each of Yum!'s core subsidiaries in Taco Bell, Pizza Hut, and KFC already offer similar multi-person meals, but such competing items hit KFC particularly hard with its higher-priced buckets of chicken.

Image source: McDonald's.

Of course, there's always a chance McDonald's will decide that more expensive multi-person meals aren't worth its time, so the Blitz Box could just as easily disappear after football season ends. But this sort of flexibility revolving around a single, stable platform is exactly one of things that makes McDonald's so attractive from an investment standpoint in the first place.

That doesn't mean Yum! Brands won't eventually rebound once its KFC China operations stabilize, and Taco Bell remains an absolute cash cow which continues to do quite well in the U.S.

But it seems those more pressing items have caused Yum! to put its KFC operations in the U.S. on the back burner -- a lapse which the more focused McDonald's was all too happy to take advantage of.

I don't expect Yum! to take the news sitting down, so time will tell whether McDonald's is able to hang on to that share. At the very least, though, perhaps this will serve as a solid wake-up call for Yum! to slow things down a bit and remember its existing markets. After all, the folks at Yum! Brands can build all the new locations they want, but it won't mean much if they can't maintain the markets they already have.

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